Contractor Doctor: My client was taken over – can the agency change my contract?

I am an IT contractor and I have a contract that pays weekly on invoice via an agency through my own limited company. After my end-user client was recently taken over by another company, the agency terminated all contractor contracts with the old company with immediate effect.

We’ve been told by the agency that we will be issued with new contracts under the new end-user client with the same terms and conditions, except that we will be paid monthly.

I had a four-week termination clause in my contract – can the agency terminate my contract without notice and change the payment terms?

Thanks

Alistair

Contractor Doctor says:

This is a situation in which it is important to be clear about the difference between being an employee and a contractor whose limited company or umbrella company is involved in a business-to-business (B2B) relationship with the agency and end-user client.

For those in employment, the situation is relatively simple. Because mergers and acquisitions are so commonplace, the process of transferring employees from the old business to the new one is generally quite straightforward, falling under the ‘TUPE’ regulations – Transfer of Undertakings (Protection of Employment).

As a contractor, what happens when your end-user client is sold to another business depends entirely on what’s in your contract. Because you’re just another B2B supplier, you get no protection under employment law.

There is also the added complication of the agent. Technically, although you might provide your contractor services on your client’s site and for your client, if your contract is with the agent, then you have no direct contractual relationship with the client.

Change in contracting party

If your client is bought by another company and becomes a different legal entity from what they were, then unless there are specific provisions for this in your original contract, the contract will need to change. There is nothing suspicious about the required contractual changes, it is simply because your contract is with a different business.

The same sort of process can happen in the public sector, where the end-user client is not bought or sold, but might change from one government agency to another, or might be outsourced to the private sector.

The key point is that the legal entity has changed, and this may affect your contract, particularly if it is direct with your client.

What’s in the contract?

Contractor’s contracts come in all shapes and sizes, agency contracts can vary considerably, and so too can direct client contracts. Therefore, there are no hard and fast rules about what happens when the client changes hands – it’s what’s in your contract that counts.

If your contract has a novation or assignment clause, then it is possible that the contract will transfer automatically to the new client. In the case of a novation, it’s business as usual as long as everyone agrees; with an assignment clause, it’s what the client wants that counts.

There could be an automatic contract termination clause with no notice in the event that the client’s company is acquired, but again you need to check the small print. And if that termination clause is there, then you signed the contract and have to abide by what it says; not to do so means you run the risk of being found in breach of contract, in which case you’ll probably be terminated anyway, and possibly be subject to legal action, too.

Agency contracts

However, if your contract is with the agency and there is nothing in your agency contract about what happens if a client changes hands, then technically the agency has to stick to the terms of their contract with you. In that case, if there is a four-week termination clause, then four week’s termination you shall have.

In practice, though, and in Alistair’s case, it’s a judgement call, as the agency should stick to the terms in the contract and give its contractors four weeks notice of termination. But it looks like the only downside is that Alistair has to wait another three weeks for his money. The upside is that all the other terms, including, presumably, the rates, seem to be the same. And, of course, he still has work!

So, in this case Alistair might have cause to sue the agency for breach of contract because the agency did not give four weeks paid notice on termination before renegotiating the contract. But the courts take a dim view of cases where actually the contractor has come out of the situation in a better position than they might otherwise have.

If in doubt, then take professional legal advice, particularly if you stand to lose out financially to a significant degree or the new terms being proposed seem unreasonable

Plus, insisting on applying the letter of the contract may cause the agency to take a tougher stance and start being awkward about the rate, insisting they should get a higher margin when renegotiating the new contract. Is it worth the risk?

If in doubt, then take professional legal advice, particularly if you stand to lose out financially to a significant degree or the new terms being proposed seem unreasonable. And it’s when questions like Alistair’s arise that the general advice to bear in mind should be – always get your contract checked out by an expert in contract law before you sign it; the relatively small investment is worth the security of knowing you’re covered should things go wrong.

Good luck with your contracting!

Contractor Doctor

Published: 25 November 2009

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